Stephen Foley: Fairness catches on as US consumer regulator goes for the simple approach

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The Independent Online

US Outlook: Elizabeth Warren is off to a cracking start in her job as architect of the new Consumer Financial Protection Bureau here.

Speaking at the University of California, Berkeley, on Thursday, fresh from meeting executives at Google, she engaged in some highfalutin' talk of building "a state-of-the-art, 21st century agency" harnessing "new tools that exist in our hyper-connected and digital world". But, as we have come to expect from the Harvard law professor, there is real substance behind the stylish phrases.

This consumer protection agency is being founded on an entirely new regulatory principle, it seems. Investor protection, as overseen by the Securities and Exchange Commission, has operated on the basis that comprehensive disclosure is the way to keep companies and brokers honest. This is what you might call the Transparency Principle, and it is what results in the dozens of pages of risk factors and footnotes in every annual report or investment prospectus – a quantity of information that has become too overwhelming to be properly useful. It is also why banks from Goldman Sachs down have escaped largely unpunished for their excesses in the credit crisis. Everything was there in the fine print, you see.

That's simply not going to do, not do at all, when it comes to consumer protection, Ms Warren has been arguing. Her bureau – and it is hers: her idea, and hers to mould, even though she has not been formally appointed its chairman and has to make do with a title as Treasury adviser – will operate on a different principle, one you might term the Fairness Principle.

Instead of creating a regulatory thicket of "thou shalt nots", she told an audience of bankers recently, and instead of using ever more complex disclosures that drive up costs for lenders, she asked to measure success with simple questions. Can customers understand the product, figure out the costs and risks, and compare products in the marketplace?

The bureau's first task is to agree on a plain-English mortgage term sheet, so that every new borrower can see, on a single page, all they need to know about what they are getting into. Such simplicity is hard. It is hard for lawyers. It is hard for bankers, too, particularly since finance is an industry that traditionally made a lot of money from penalty fees and from in effect arbitraging the gap between what borrowers think they are getting into and what they are actually signing.

It will not be enough, therefore, to leave rule making and enforcement to a discussion between career regulators and industry lobbyists – and Ms Warren's trip to Google revealed she is already thinking important thoughts on how to make the Fairness Principle real.

Her main idea is crowd-sourcing, seeking information from consumers about the frustrations they have with financial products and the tricks they discover being played on them, and posting financial term sheets online where anyone can examine them for fairness. She has used the example of Wikipedia and of a "neighbourhood watch" to supplement the "cop on the beat" that is the usual metaphor for a regulator. It seems to me most like the system that medicines regulators such as the US Food and Drug Administration use where doctors must report every side effect felt by their patients, so that the data might signal if an unsafe drug is on the market.

The technological specifics are yet to be worked out in consumer protection. Ms Warren's bureau will have to go far beyond surveys, and even solicitation of complaints. Interaction with the consumer protection bureau will have to be built into products, through continual feedback from borrowers and savers, something that ought to get easier as more and more banking is done online.

Done right, Ms Warren's new agency could provide a model for regulators around the world.

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